Steeled for Rising Profits

By Fleming Meeks

THINGS CAN’T GET MUCH WORSE for (ticker: IIIN). The company makes steel wire reinforcing products that go into concrete. As the price of steel rose last year, the company replaced its inventory at ever higher prices. Then commercial construction went in the tank, and Chinese producers stepped up imports at below market prices. In the company’s fiscal third quarter, shipments fell 28.7% and average selling prices fell 23.4%. Nor did Insteel benefit from lower steel prices; the company was still working off its high cost of steel.

In fiscal 2009, which ends in September, Insteel is expected to lose $21 million, or $1.27 a share, on revenue of $225 million (including 92 cents a share in inventory write-downs). That’s down from profits of $2.47 a share in FY ’08. The shares dipped below $5.00 in March from above $20 last year. Yesterday they closed at $12.14. The stock could reach $16 in a year.

Insteel has a lot going for it now. Chinese imports fell off after U.S. manufacturers filed antidumping charges with the International Trade Commission. The company finally worked off its high-cost steel inventories. And as bad as the business is, fiscal third sales jumped 34% over the second quarter, and capacity utilization ticked up five percentage points to 42%. Competitors, meanwhile, are throwing in the towel, shutting down 20% of total domestic capacity in the last few months.

The low-cost producer, Insteel invested $45 million in new and more efficient production facilities in recent years. That spending is over. The company has no debt and $21.6 million, or $1.23 a share, in cash on its balance sheet.

Commercial construction is still trouble, but Insteel’s products also go into bridges and highways. That business will get better over the next few years as President Obama’s stimulus package kicks in. For fiscal 2010, analysts expect Insteel’s earnings to rebound to 73 cents a share, rising to 98 cents in FY ’11. Some holders of the shares think earnings could be much higher.

“The first three fiscal quarters of fiscal 2009 have been a nightmare for Insteel and the industry,” CEO H.O. Woltz told analysts in July. For Insteel, at least, that nightmare may be over.

Fleming Meeks is executive editor of Barron’s and the founding editor of Barron’s Daily Stock Alert. He previously served as editor of SmartMoney, The Wall Street Journal Magazine, and assistant managing editor of Barron’s. Meeks began his career in journalism 25 years ago as a staff writer for Forbes. He holds a B.A. degree from Windham College.If you have comments or questions, please contact him at fleming.meeks@barrons.com

David Englander is a staff writer for the Barron’s Daily Stock Alert. He joined in 2008 as a reporter. Prior to Barron’s, he worked as a consultant, advising Fortune 500 companies on growth strategies and mergers and acquisitions. He has also worked as an independent equity analyst. Englander holds a B.A. from Amherst College, an M.B.A. from the University of Rochester and an M.F.A. from Columbia University.If you have comments or questions, please contact him at david.englander@barrons.com

Alexander Eule has been a staff writer for Barron’s Daily Stock Alert since 2010 and a reporter for Barrons.com since 2006. Prior to the Stock Alert, Eule wrote the site’s Barron’s Take and Weekday Trader features, offering frequent insights into individual stocks and the broad market. He holds a B.A. from Columbia College and an M.S. in Journalism from Columbia University.If you have comments or questions, please contact him at alexander.eule@barrons.com